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Finding fraud in bankruptcy cases

Recover fraud proceeds by determining insolvency date

January/February 2017

ByRoger W. Stone, CFE

HFCC, a fertilizer and chemical applicator, went bankrupt. Investigations discovered the owner committed bank fraud, financial statement fraud and performed fraudulent conveyances or fraudulent transfers. However, a judge ruled that the author and the company's outside CPA didn't prove the company was insolvent during all the transfers, which limited the penalties. Here the author proposes a better way to establish the date of the insolvency of an entity and thus recover more fraud proceeds.

A fraud case I worked reminded me that establishing the date of insolvency in a business bankruptcy filing can be key to recovering fraudulent conveyances or preference payments.

HFCC was a custom fertilizer and chemical applicator in a sparsely populated county in southern Illinois. The owner of the company was purchasing chemicals from large brokers in Iowa. The manufacturers of the chemicals were offering year-end rebates to purchasers based on a sliding scale. In other words, the more chemicals purchased from a manufacturer the higher percentage rebate paid to the purchaser.

For example, if the owner of HFCC bought $100,000 worth of chemicals from a manufacturer he might get a 5 percent rebate or $5,000 at the end of the year. However if he purchased $2 million of chemicals from the manufacturer he might get 15 percent or $300,000 in rebates during the year.

HFCC's owner figured out that if he could buy from the distributors in bulk and broker the goods out to wholesalers in the Midwest region of the U.S., he could qualify for maximum rebate percentages.

Here are the conditions of the chemical sales environment that HFCC's owner was trying to capitalize on:

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